UK – Going Great Guns!!

The preliminary GDP figures from the ONS have shown a 0.8% rise in Q3, beating Q2’s 0.7%, and this represents the UK’s strongest rate of growth since the second quarter in 2010. Capital Economics said it was encouraged that the UK looked to be demonstrating a healthier rate of growth than the rest of the G7 in Q3, but noted the UK data had been released earlier than that of its peers.

At sector level, the improvements looked fairly balanced, with all the major economic sectors contributing to growth. Manufacturing and construction grew by 0.9% and 2.5% respectively, while the services sector rose by 0.7%.

At OCM we expect the beneficiary of this growth and momentum to be Mid-cap and small cap stocks and they look to be key asset allocation going forward rather than large cap companies. We also feel that there is some momentum now behind the recovery as there is evidence abound, in many areas, to confirm that we are at the end of the recessionary phase and moving firmly into the recovery phase of the economic cycle. It is therefore imperative that portfolio asset allocation reflects this and a focus on mid and small caps is good because they have a greater domestic earnings profile and would gain from the growth seen in core cyclical sectors, such as house builders and technology. That growth was 1.5% higher in Q3 2013 compared with the same period last year, when the UK was enjoying the boost from the Olympics so this is also a sign of progress.

Expectation in the Coming Quarter

We are expecting a slight pullback in growth over the coming months, but also a surge in housing activity and its related consumption. Overall though we are expecting the housing momentum should keep the UK growing at a steady pace throughout 2014. Looking ahead, the reason why we are expecting a bit of a slowdown from 0.8% a quarter is that we are still seeing a fall in real pay, the fiscal squeeze and the dormant state of the Eurozone economy are all factors that will prevent the UK’s economic recovery from gathering much more pace. But with employment growing, confidence returning and productivity still well below its potential, it seems unlikely that the recovery will falter that much.

And Globally!

Last week, Republicans and Democrats managed to avoid the threat of a US default, and effectively reopened the government after a 16-day shutdown.  The deal allows the government to be funded through to 15 January next year, and suspends the debt ceiling until 7 February and as a result the can has been kicked down the road again!

As we have been mentioned, the result of this uncertainty is a pullback in investor confidence and although that is a negative, the markets have rallied because the prospect of the tapering of Quantitative Easing (QE) is now likely to be delayed until spring 2014 at the earliest. As the world is addicted to the QE drug, the negative is a positive and we expect the markets to rally further towards the end of the year.

Portfolios Update

We have seen significant upturns in the portfolios we run for clients over the last month since we reallocated back to equity and altered the asset allocation to ensure it was placed to investing more mid cap and small cap areas as detailed above. The performance of the portfolios YTD is detailed below for your perusal along with the UK Gilt Index and FTSE all share for comparison, noting that past performance is no guarantee of future performance. The reason why we use the FTSE and the Gilt index is that our portfolios are naturally in between as regards to asset allocation as we are never really 100 equity nor 100% gilt exposed.

Total Return Bid-Bid line chart year to date (from 31 Dec 2012 to 24 Oct 2013) from UK UT and OEICs universe. Rebased in Pounds Sterling


And Finally!

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We will therefore from next week be sending out daily updates and market commentaries using a HTML link giving a taste of our message and you will have to click on a link to the website to review the full content. I apologise in advance if anyone finds this annoying but to ensure we can cope with the rapid expansion in interest in what we have to say we have had no choice, as Outlook can no longer support the volume.

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We hope you like the new format and have a lovely weekend. As always if you have any questions please come back to us directionally, and stay safe!